Buy Now Pay Later (BNPL) is a credit facility where the borrower can buy a product without any down payment and repay with interest-free installments. BNPL has emerged as an alternative to credit cards since it is cheaper and more convenient. And the primary market seems to be Gen Z customers without credit cards. The current exponential growth of e-commerce is driving BNPL. E-commerce companies offer this facility as an embedded finance option seamlessly integrated with the transactions. Merchants benefit because BNPL encourages purchase and leads to brand loyalty. BNPL is available for a variety of online purchases, including food. BNPL is all set to grow, especially given the exponential growth of e-commerce, the proliferation of smartphones, and the expansion of the younger demographics.
What is BNPL?
Buy Now Pay Later is a form of borrowing where the borrower can buy a product without any down payment and pay after a certain period either in one shot or pay in monthly installments. Usually, the borrower pays no interest. BNPL is cheaper and more convenient than using a credit card or taking a consumer durable loan or a personal loan. Also, this is useful for a lot of the younger population who don’t own a credit card. BNPL is available for a variety of online purchases, including food.
BNPL is taking off because of the boom in e-commerce and especially with millennial customers. Usually, customers can avail themselves of this facility by clicking the widget next to the product on an e-commerce site. BNPL is all set to grow especially given the exponential growth of e-commerce and the growth of smartphones, and the expansion of the younger demographics.
Global BNPL transactions are likely to reach US$ 680 billion by 2025. In India, BNPL payment method is all set to garner about 10% of all e-commerce transactions in the next few years.
What are the features of this facility?
- Very small or no upfront payment required
- Compared to a credit card, you get a more flexible repayment plan. And you don’t need a card.
- You don’t pay any interest because the seller bears the interest charges.
- Instant approval
- Conversion into EMI payment at the end of the credit period
How does it work?
Customers click on the widget next to the product that they are buying from an e-commerce site. The loan approval happens instantly. Some companies do a ‘soft credit check.’ The seller bears the interest charges, and hence the facility is interest-free for the customer. You don’t need a credit card. You can pay after two weeks or have the option to pay in monthly installments. BNPL companies charge the merchants a fee.
What do customers use the BNPL facility for?
For almost anything, you would use a credit card for right from mobile phones to home appliances to electric vehicles and various e-commerce purchases. Consumers are using BNPL even for travel, dental services, and beauty treatments. With specialist BNPL companies springing up everywhere, customers have started using the facility for anything they want to buy except for large value items like houses or cars.
Payment aggregator platforms
Payment aggregator platforms such as Pine Labs and Ezetap offer the payment technologies that enable merchants to provide BNPL facilities to their customers. Besides technology, they also bring value-added services such as banking partnerships and a range of debit card integrations.
How is BNPL better than credit cards?
- The process of approval for a credit card is cumbersome, and you need to carry a physical card and keep getting a new card periodically. With BNPL, there is no cumbersome credit approval process, and everything happens online.
- Credit card companies charge an annual fee and late fee in addition to the interest charges. BNPL companies charge you no fees at all, and you don’t pay any interest.
- With credit cards, the longer you take to pay, the more you end up paying. In effect, the total cost of the purchase goes up substantially. With BNPL, you pay only what the vendor shows on the website.
Who are the major players in the BNPL market?
The emerging market for BNPL is served by the new (mostly) mobile-based startups, payment companies that have diversified into BNPL, leading e-commerce players that offer BNPL as an embedded option, and traditional banks that don’t want to lose out on an emerging opportunity.
BNPL Startups
These companies found a gap in the consumer credit space and filled it with a new, technology-based avatar of an age-old lending method. Klarna of Sweden is the pioneer. BNPL companies have sprung up all over the world.
Klarna, Afterpay , and Affirm are general-purpose BNPL companies that offer installment payment facilities for a variety of online and offline purchases. But there are also several specialized players in the market.
While there are many general-purpose BNPL companies, increasingly, the trend is to specialize in a particular vertical industry such as travel, etc.
For example, Uplift and Fly Now Pay Later are BNPL companies that focus on travel. They have partnerships with airlines, cruise companies, and vacation resorts.
The US-based BNPL company, Sunbit, offers an installment payment facility for everyday items such as car repair, optical and dental services.
Twisto, based in Europe, offers its pay later services by giving you a monthly credit limit, and you can shop online or offline.
In India, BNPL companies such as Simpl, ePayLater, LazyPay , Kissht and ZestMoney offer pay-later services.
Payment companies
Globally, PayPal is a serious contender in the BNPL space. In India, payment fintechs such as PhonePe and PayTM have diversified into BNPL.
E-commerce majors
Prominent e-commerce players such as Amazon and in India, Flipkart, offer pay-later services. In India, the ride-hailing company Ola offers Ola Postpaid.
Incumbent banks
Large traditional banks like Citibank, JP Morgan Chase, and the American Express group have also entered this lucrative market. In India, ICICI offers BNPL via ICICI PayLater, and HDFC Bank has a BNPL product called FlexiPay.
Benefits to the customer
- Ability to buy things that otherwise be unaffordable
- Simple sign-up and almost instant credit approval
- Since BNPL companies don’t report delayed payments to credit rating agencies, your credit scores are not affected.
Benefits to merchants
- Increased conversion rate for the merchants
- Lower ‘sticker shock’ for the customers resulting in higher values
- Higher customer loyalty with better buying experience for the customers with the embedded BNPL option
- Increased referrals
- Lower transaction costs since BNPL firms charge a lower fee than credit card issuers.
- Unlike credit cards, there is no chargeback risk for merchants
What are the disadvantages of BNPL?
- BNPL, just like credit cards, encourages you to buy things that you don’t need
- If you delay payment, your credit scores will get negatively impacted.
- BNPL doesn’t help customers build up their credit as credit cards do.
- BNPL doesn’t offer the same consumer protection that credit cards provide.
What is the future of BNPL companies?
Since BNPL seems to be riding on the coattails of e-commerce as an embedded finance option, with the exponential growth of e-commerce, BNPL is all set to explode in volume. Buoyed by the results in e-commerce, companies in other sectors such as travel and health care are seriously considering BNPL solutions.
The competition is likely to intensify. Payment companies, especially the older fintechs such as PayPal, are getting into the game, and so are established banks. Banks understand the business of credit, given their long history, but technology will be a bit of a challenge for them. Banks and credit card companies will get negatively affected. And the payment networks are also likely to see reduction in volumes.
Since BNPL products are not loans in many countries, they are generally under the radar of banking regulations. With growth, BNPL will be subject to regulatory oversight, and we can expect the growth to decelerate and lead to some consolidation in the industry.
Another development that could emerge is that BNPL players will specialize in specific industries or product categories.
Also, BNPL is likely to go mainstream. Instead of just the younger millennials and Gen Z customers, more and more older customers will also start using the facility.